Understanding and reviewing your VAT Return

For businesses who complete monthly or quarterly returns, both the VAT return and any VAT payable are due to HMRC one month and seven days after the end of the VAT period.

VAT RETURN EXPLAINED

VAT RETURN BOX	EXPLANATION
Box 1	Output VAT due on sales + Output VAT due on Reverse Charge (explained below) (If you have sales at 20% and no zero-rated sales or reverse charges, this box should equate to 20% of box 6)
Box 2	VAT due on EU acquisitions – N/A due to Brexit
Box 3	Sum of Box 1 and 2
Box 4	Input VAT reclaimed on business purchases for which a valid VAT invoice has been provided + Input VAT reclaimed on Reverse Charge (explained below)
Box 5	Difference between box 3 and 4 = VAT payable to HMRC/ VAT due from HMRC
Box 6	Net sales + Net amount of reverse charges
Box 7	Net purchases + Net amount of reverse charges

VAT RATES EXPLAINED

VAT RATE	EXPLANATION	EXAMPLES
20%	The standard rate for most sales and purchases is 20%.	Purchase of laptop
Reduced rate 5%	A few products and services are charged at a reduced VAT rate of 5%, but these are generally more domestic items.	Childrens’ car seats, Home energy costs, Certain food sales
Exempt	If an expense is exempt, it means that you can’t charge VAT on it. Because VAT can’t be recovered on these purchases, they mustn’t be included in your VAT records.	Bank fees, Insurance, Interest on loans
No VAT	Some goods and services fall outside the scope of the VAT tax system. You obviously can’t charge or reclaim VAT on them, so they mustn’t appear on your VAT return.	HMRC payments (PAYE/ Corporation tax/ VAT), Wages and salary payments, Pensions payments
Zero rated	When expenses are zero-rated, the goods are still VAT-able, but the rate of VAT is 0%.	Travel/ taxi, Client entertainment, Basic foods
Reverse charge	Reverse Charge expenses occur where a service would have had VAT on if it were purchased in the UK, but it’s been purchased from an overseas supplier that can’t charge UK VAT. While VAT cannot be recovered on these purchases, they are still included in your VAT records but on both box 1 and 4 of the return (so you’re effectively cancelling out the reclaimed amount). As a result, reverse charge expenses do not impact the VAT due/ reclaimable.	Google Ireland, Microsoft Ireland (where specified), Services provided by US companies Eg. Miro, Hubspot, Zoom

PAY YOUR VAT BILL

Make sure your payment will reach HM Revenue and Customs’ (HMRC) bank account by the deadline. You may have to pay a surcharge if you do not pay on time.

METHODS OF PAYMENT

Direct Debit
Use your VAT online account to set up a Direct Debit.
Set up the Direct Debit at least 3 working days before you submit your online VAT return, otherwise the payment will not be taken from your bank account in time.

Online or telephone bank transfer
Sort code: 08 32 00
Account number: 11963155
Account name: HMRC VAT
Reference: Your 9-digit VAT registration number which can be found on your VAT registration certificate

By debit or corporate credit card online
There’s a fee if you pay by corporate credit card or corporate debit card. The fee is not refundable.
There’s no fee if you pay by personal debit card.
You cannot pay by personal credit card.
You’ll need your 9-digit VAT registration number to make a payment.

PLEASE NOTE

1. It is your responsibility as the business owner to retain accounting records for at least 6 years.
2. Where expenditure has a mixed business and private purpose, the related VAT should generally be apportioned and only the business element claimed.
3. VAT cannot be reclaimed on:
   a. anything that is only for private use. When VAT is used for a mixture of business and private or other non-business purposes, it will be necessary to apportion the VAT incurred or to account for output VAT in respect of private use.
   b. expenses without a valid VAT invoice
   c. proforma invoices
   d. invoices not in the name of the company
   e. the cost of entertaining or providing hospitality to people you do business with (for example theatre or sports tickets)
   If your company records were ever inspected, HMRC may request a valid tax invoice and evidence that this is a business expense. Without this, they may ask your company to repay the VAT, plus additional penalties and interest.
4. VAT can be reclaimed on the following. Please ensure you retain copies of the tax invoices.
   a. GoCardless fees
   b. Xero
   c. Uber
5. Recent changes to VAT rates
   a. Uber charges VAT at 20% from March 2022 – It is the client’s responsibility to retain copies of the invoices (these can be downloaded using the steps here), and to confirm that the trip was a business expense, and not a personal one.
   b. Input VAT can be reclaimed on certain LinkedIn invoices. In the absence of an invoice, the reverse charge rules will be applied.

VAT PENALTY

For information on the new VAT Penalty Regime, please click here.